CLICK HERE to access the associated slides.
CLICK HERE to access the associated slides.
Takeaway: What to watch on the election 2016 campaign trail.
Below is a brief excerpt from Potomac Research Group Chief Political Strategist JT Taylor's Morning Bullets sent to institutional clients each morning.
TRUMP'S POLITICAL ECONOMY:
Exit polls from this week's primaries yielded some insight into what's making Donald Trump's supporters tick -- and how their motivations are changing. Across the Super Tuesday states, 71 percent of Republican voters are "very worried" about the economy -- and among those voters, more broke for Trump than any other candidate.
Remember -- the issue that originally gave him traction was national security and the border. Additionally, independents showed up in large numbers and they mostly broke for Trump. He's bringing in new supporters into the process, but at the cost of losing support from traditional Republicans.
Trump has outperformed expectations everywhere except the caucus states. Much of his support comes from new voters who are less likely to participate in caucuses. It's important to keep in mind that KS, KY, ME, and HI are caucus states holding their contests on March 5th and 8th -- making up half of the number of states voting between now and March 15th.
If Trump continues underperforming, it will allow Marco Rubio, Ted Cruz and John Kasich a shot at denying him some of the 128 delegates.
FINAL COUNTDOWN TO FLORIDA:
There's less than two weeks until the Republican field has a date with destiny in the Sunshine State. Florida and its 99 winner-take-all delegates will determine the fate of Rubio's campaign. His campaign is already on the brink, a loss in his home state would put him away for good. Despite their protestations otherwise.
Floridians hold the power to end Rubio's campaign and propel Trump to the nomination -- but will they be moved by the tens of millions of dollars that will be spent on anti-Trump ads (the establishment to the rescue!) between now and March 15.
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Takeaway: A look at volatility and what it means for the Russell 2000.
Phew... the bulls who missed calling the slowdown appear to be back with the re-acceleration call!
Remember, the Federal Reserve hasn't proactively predicted a recession in the last 20 years. Meanwhile. Old Wall consensus (i.e. strategists who love to call bottoms in stocks and predict "face-ripping" rallies) missed the last three U.S. economic cycle peaks (2000, 2007 and 2015).
Here's analysis on volatility from Hedgeye CEO Keith McCullough in a note sent to subscribers this morning:
"We really did need sentiment to pivot back to bullish (positioning was bullish until we hit the FEB lows, then they sold the lows – then the squeeze); that said the bullish TREND in equity volatility has a risk range of 15-30, and now we’re at 17 – next big move = up"
What does this mean for equity markets?
"While I’ve been bearish on the Russell 2000 (and SP500) since July, we’ve had some massive opportunities to underweight, sell, short, etc. Small Cap (SIZE) as a style factor at obvious lower-highs (from the all-time bubble high of 1295); now = another one of those opportunities with immediate-term down side to 991 – Costco comps of 0% is not “an economy that appears to be picking up.”
In other words, it's fine if you want to believe Old Wall storytelling that "the bottom is in." But remember all stories come to an end.
Three quick points around today’s domestic Macro data:
Spill Over? The bullish foil held out against the ongoing industrial recession has been the purported strength in the services economy. With the ISM Services reading sliding for a 4th consecutive month in February, the Markit Services PMI contracting for the first time since 2009 (outside of Gov’t shutdown) and the Chicago PMI (which includes both manufacturing and services) holding in contraction, that narrative weaving is slowly unraveling.
Yes, the industrial data is showing some fledgling sequential stabilization – 12 consecutive months of negative growth will do that to a comp. But as it stands, Forward Capex Plans remain in decline, C&I credit is tightening, Small Business lending is in retreat, CRE lending is decelerating and aggregate income growth for consumers is slowing.
Less bad is good but generally only if you have a catalyst and a fundamental underpinning for some amount of sustained improvement. It’s hard to argue a sequential base-effect stabilization in manufacturing, in isolation, as a durable catalyst. Indeed, the inability for weak demand, slowing income growth and tighter credit to support a sustained advance in investment and industrial activity feels like a tighter thesis than ‘easy comps’.
In short, services consumption represents ~65% of household spending and ~45% of GDP so the trend obviously matters. Peri-contractionary manufacturing activity and decelerating service sector activity is not an escape velocity macro factor cocktail.
It’s the Cycle Silly! We’ve been in full broken record mode on this of late but month-to-month, counter-Trend oscillations in prices/fundamentals don’t obviate the reality of the cycle. Employment Growth, Income Growth, Consumption Growth, Consumer Confidence and Corporate Profits all peaked in 4Q14/1Q15. Not incidentally, all things equities peaked in 2Q15.
Employment growth will continue to slow from here and unless you believe wage growth will continue to accelerate significantly faster than employment growth declines then the math says aggregate income growth will continue to decelerate and the peak in consumption growth will remain rearview. Summarily, the prevailing negative 2nd derivative Trend across each of those macro factors will continue.
Super Huge & Big (Conclusion): Tomorrows NFP number might be worse sequentially … or it might be better. We don't know and don't claim to have any particular edge on the monthly number. One could argue that Gold is signaling the former …. Treasury yields the later. Fortunately, on a medium-term duration, the investment conclusion is largely the same.
- If the data continues to deteriorate, in spite of favorable seasonal and comp dynamics, lower-and-slower-for-longer and its associated allocations continue to work.
- If the data gets an optical boost – edifying policy makers conviction around their hawkish lean - we’d expect the further attempts at policy normalization to perpetuate the same deflationary and growth prohibitive forces that have characterized the last 8-months.
Christian B. Drake
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